Private debt

17 September 2026, 21:00 UTC Chief Investment Office GWM Investment Research

Private debt CIO View: Private debt Karim Cherif, Head Alternative Investments, UBS Switzerland AG Richard Huang, CAIA, Private Market Strategist, UBS AG Hong Kong Branch Antoinette Zuidweg, Alternative Investments Strategist, UBS Switzerland AG

• Direct lending returns moderated in the first half of 2026, returning a modest 3%, down from 4.5% in 1H25.

• Sentiment remains cautious, weighed down by concerns over loan portfolios and increased redemptions from perpetual private business development companies (BDCs).

• The risk environment remains elevated, underscoring the importance of selectivity and quality.

• With spreads tight and credit stress rising, we expect risk- adjusted returns to stay moderate. For investors with heavy Source: UBS and GettyImages allocations, diversifying into other alternative strategies—while carefully considering their differing income and risk profiles—is Figure 1: Direct lending delivers advisable. modest returns in 1H26 Performance across credit segments

Private debt in the current environment • CIO continues to see merit in private debt within a diversified, long-term portfolio, but the near-term risk-return outlook has weakened amid tight spreads and normalizing defaults.

• Direct lending returned 3.0% in 1H26 on an unlevered, gross-of-fees Note: As of 30 June 2026. Returns for the CDLI are basis, down from 4.5% in 1H25. Levered, net-of-fees returns were unlevered gross of fees. Source: Cliffwater Direct Lending Index, LSTA Leveraged Loan Index, BofA US 1.5%, broadly comparable with returns of 1.3% for US leveraged loans High Yield, Bloomberg, UBS September 2026 and 1.9% for high-yield bonds. We maintain a Neutral stance and anticipate returns of 5-6% for direct lenders in 2026. Figure 2: 2021-22 vintage experiencing • Market activity has weakened. First-half direct-lending volumes were greater stress approximately USD 110bn, 13% below the prior-year pace. Competition Breakdown of non-accruals added in LTM 2Q26, by from broadly syndicated loans reduced direct lenders’ share of LBO vintage (as % of total) (leveraged buyout) financing from 61% in 2025 to 44% in 1H26 (PitchBook LCD). Meanwhile, caution around software lending has encouraged a rotation into sectors perceived as less exposed to AI disruption, such as health care.

• Fundraising remains under pressure. Private debt managers raised USD 42bn in 1Q26, 31% below the 2025 pace. Perpetual private business development companies (BDCs) recorded net outflows exceeding USD 3bn in 2Q26, with redemptions outpacing inflows for a second consecutive quarter. Sustained performance improvement will likely be needed for inflows to return to 2024-25 levels. Source: Cliffwater Direct Lending Index (CDLI), UBS, as of September 2026 • Loan pricing offers a limited cushion. Origination spreads averaged 499 basis points over the 12 months through July, slightly below the 2025 average, while the widening in the second quarter proved temporary.

This report has been prepared by UBS Switzerland AG, UBS AG Hong Kong Branch. Please see important disclaimers and disclosures that begin on page 5.

• Credit stress is increasing but remains contained rather than systemic. Figure 3: Our base-case scenario points Smaller borrowers, junior loans, and 2021-22 vintages face the greatest to further moderation in returns pressure. The share of direct loans marked below 90 reached 7.45% in Estimated net of fees levered fund returns over 12 2Q26, while payment-in-kind conversions rose sharply in 1H26. Elevated months under UBS CIO scenarios redemptions, weaker lending economics, AI-related disruption, and the increase in loan maturities from 2028 warrant close monitoring.

• Software sentiment has stabilized, but there is limited room for complacency. AI-driven disruption remains a central source of uncertainty, particularly for legacy software vendors with weaker competitive moats. By contrast, industry-specialist SaaS, data infrastructure software, and mission-critical providers in security, compliance, and governance should remain more resilient or benefit from AI adoption.

• AI infrastructure financing…